The market for hedge fund and private equity fund stocks has fallen by nearly half since December’s dramatic runback in the high-flying stock market.
Investment managers say that there’s a lot of pressure on them to raise funds immediately for any major acquisition or to help their underperforming funds to reach profitability.
According to the Investment Company Institute’s Market Risk Report 2017, there were 1,766 hedge funds in operation on Nov. 6, down from 3,928 in December. About 2,500 private equity funds, which have lower expenses, now exist, a 16 percent increase over 2016.
The report found that the average hedge fund, with assets under management of about $6.2 billion, invested in a hedge fund with an expense ratio of about 5 percent, or $20 million, on a $50 billion fund.
In contrast, a private equity fund with about $200 million invested in hedge funds with similar expense rules would have to save $200 million, or $1.5 billion, for every $1 invested to be in line with hedge fund expense levels, says Daniel Gudin, chief financial officer of the I.C.I.
And that’s not counting the cost of the firm that manages the hedge funds for investors. He says that a company can “cut its hedge fund expense by as much as 50 percent,” adding that it’s “unlikely” to be profitable.
The sharp decline in the hedge fund industry has been particularly damaging for the funds that are most likely to succeed, he says. That’s because the funds typically have a big presence on the Nasdaq. They don’t have to spend as much on advertising or marketing to draw money, he says, and they have higher operating standards and much better capital structures for taking big losses if they make a mistake.
Gudin says that hedge funds are also more highly regulated and that the rules are strict.
But he says that some hedge fund managers are likely to turn their efforts to private equity and exchange-traded funds, because they’ve learned the importance of the market’s momentum, especially since President Trump was elected and the economy boomed. There’s also a growing appetite for long-term funds that have long histories, and they could emerge as a key growth segment for hedge fund operators.
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